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Wednesday, December 14, 2016

There a lot of talk about the ever expanding US - and Global deficit. Here it's about 20 trillion and counting.

But does it really matter? Haven't we gotten along fine so far?

AND: Why should we ever have to pay it back, if we owe it to ourselves?

The answer is simpler than you might think. The answer is that deficit spending borrows growth from the future.

The same way that cocaine borrows energy from the future. It feels great now. And it works for longer than anyone might expect. You just need larger and larger doses.

And if you use that growth or energy to build is a business, or write a symphony, then great, it may just pay that debt back in the long run. Maybe.

But if you use it to go on a gambling spree in Vegas, or in the derivatives markets, well it will probably all be wasted.

Some of the debt does go to building businesses. But unfortunately, because in the private sector the vast majority of it is acquired and used by Financial Institutions that are in the gambling business, most of it is used for gambling.

And in the Government most of it is used either to fund wars that build nothing and return nothing and mostly accomplish nothing, and in paying off massive bureaucracies that exist to fund themselves as well as the drug and insurance companies that are the major beneficiaries of their programs such as medicaire.

But - does it matter if we/they never have to pay it back?

Yes, it does matter, because all of it dilutes every dollar made in every productive enterprise. It makes everything more expensive for everyone. Until we get to where we are now. Where it takes a quarter of a million dollars to send one kid through college. Where it takes a million dollars to buy a little two bedroom apartment in Brooklyn.

And where it takes six dollars of debt to create one dollar of GDP.

And where no matter how much we borrow, GDP is only positive because we keep changing the metrics wherein inflation is calculated. Who could doubt if we included Education, Health Care, and Housing in the Inflation figures, that GDP would now be negative, by quite a bit?

What does this mean for Gold?

For all hard assets this means that the value goes up in direct proportion to the dilution of the currency. Gold is the only hard asset currency.

Right now as the dollar has become the global safe haven gold languishes. But when it becomes clear the US economy is in the same boat as Europe and Japan, gold will have its day.

Sunday, December 11, 2016

This Lincoln penny which is not quite a century old, which looks exactly like the 39,000 other Lincoln pennies minted in 1921, and also looks exactly like the other 50 million or so Lincoln wheat pennies, except for the date, sold recently at a Heritage auction for $55,000.

It is minted in copper so it has almost no intrinsic value.

It has no historical significance to speak of.

It is not very visually imaginative or accomplished.

In fact, is holds no interest even for the person who purchased it except for the number on the holder which says "MS 68." This same number can be found on countless other holders. But on this holder with this absolutely pedestrian coin it is worth $55,000 at auction. Because this number makes it a "condition rarity."

Never mind that it is a condition rarity of something no more unique or significant than an exceptionally well preserved shoe lace or ball point pen.

Not to pick on Lincoln pennies. The same can be said for Jefferson Nickels, and Morgan dollars, some of which sell for much more than this.

Let's compare this to this Alexander the Great Stater:

Also a condition rarity graded in CH MS STAR. We have a coin of tremendous historical fascination as it was minted just after the death of Alexander, in about 330 BCE, in order to establish the legitimacy of his half brother Philip III as King of Macedon, and, in fact Emperor of the greatest empire the world has known to that time. It is also a masterpiece of artistic achievement. And it is minted on a quarter ounce of gold - about 2300 years ago.

Now, it is impossible to say what the original mintage is, but it is safe to say no more than 100 examples have come to market in the last 50 years in any condition, and perhaps far less than that. And the portrait is dissimilar to that on any other coin.

So what is this worth? Tough to say, exactly, but certainly less than $55,000 for the Lincoln penny pictured above. In fact the last coin is similar condition (CH MS without the star) sold for $42,000 in a Heritage Auction.

For the money, which would you rather own?

And this is not an outlier comparison. Really, the same comparison can be made to many other rare ancient coins of tremendous historical importance with any number of us condition rarities of nickels, quarters, dollars that are less than 100 years old - from mintages in the 10's and 100's of thousands.

Thursday, December 8, 2016

Here's a chart of the US dollar index since the 70's
You can see above where Volker broke the back of inflation. Since then every US president , starting with Reagan took advantage of the strong dollar, and low inflation to borrow from future growth through A) Massive Deficit Spending and B) Permanently negative real rates. Japan followed suit, even more aggressively and they were lauded as economic magicians until they sank into a permanent recession. Europe followed suit right after the creation of the Euro. Now they're in a permanent recession. And so are we!

Not that anyone will admit it. Yet.

So what next? Well, we win the ugly contest. Our rates (of growth and interest) though negative in terms of real inflation are still way more attractive than rates in Europe and Japan. So Capital is flowing here. And that is accelerating.

So the Dollar index must go higher. And higher. How high? Well, maybe as high as in the Volker era.

But then what? After borrowing growth from the future for 40 + years, that game has been burnt out.

We just aren't going to grow our way out of it.

So then what?

What happens after all that capital has come here, and we fall into an endless recession?

What then, Mr Wizard?

Nobody knows, but it will be good to own some things with intrinsic value.

Friday, November 25, 2016

There was a lot of speculation that a Trump victory would send stocks plunging and gold soaring. Like almost everything, the Pundits couldn't have been more wrong. Stocks are soaring and gold is dropping like a stone.

What's Up?

If you listen to the pundits now you'd get the story that Trump's economic policies (which don't yet exist) have the makets primed for a great recovery - which will be a knife in the heart for gold.

This is a load of BS. Nobody really expects the US or Global economy to recover. The amount of debt in the US and Global system is staggering.

When Reagan cut taxes back in 1980 it took $1.5 dollars of debt to creat 1 dollar of GDP. Not efficient over the long run. Still borrowing growth from the future. But effective in the short run.

Now it takes 6 dollars of debt to create 1 dollar of GDP. And that number is rising as the total debt burden rises. There's no way Trump can borrow his way to a recovery. Not even very short term.

So What's up?

Here's the deal. The Trump election was a confirmation of the Brexit vote. The market realizes that the populist anger that is sweeping the Globe will next be focused throughout Europe. Italy votes on Dec 4th. France votes April 23 2017. If these votes go as polls now suggest, the Euro will ultimately fail. The European Union will break up. And there is no mechanism for a breakup of the Euro Union.

What that means is all that money is now flooding into the US. Because the dollar is safer than a disintegrating Euro no matter what is going on in the real US economy.

That is forcing the Dollar to spike upward. Asset bubbles are expanding here in the US. The market will rise, high end hard assets will spike. And Gold will move opposite the dollar for a period of time.

But the fact is the real US economy is in deep trouble. That's why Trump was elected. People here are starving. Yes, starving. Afraid of losing their homes. Not able to afford college. Their kids can't get jobs and are living in their basements. On meth.

And a spike of hot money into the US will only make things more expensive for them.

It's a recipe for disaster. And when the market realizes the effect of the hot money on the US economy Gold will surge. First it will start to move with the dollar. Then it will outpace the dollar. Then the dollar will drop precipitously against all hard assets as people lose faith in all their institutions and seek the ultimate safety against disaster.

When will this happen?

Forget timing. Only geniuses and idiots time the market. Play safe for the long run. Because it's not that far away.

Thursday, April 7, 2016

You've decided it's worth buying coins. The obvious choice for many Americans is US coins, just as French collect French coins and Russians collect Russian coins.

Ancient coins are interesting because though they may have been minted in Greece or Turkey or Italy they belong to all modern western and mid-eastern cultures, as the Ancient Empires spread through most of Western and Mideastern world - all the way to India, in fact. And these empires along with their philosophy and customs radically affected all areas they conquered. If you're American, almost all of you political and social institutions are based on Greek models and Greek thought. The founding fathers were are all fluent in Ancient Greek - as were all educated people of their period.

Ancient Coins can he divided in many ways. In a very basic way they can be divided into a few basic categories. First, there is Archaic Coinage which began in Lydia in about 625 BCE and spread through Greece Turkey and Persia in about 500 BCE.
Archaic coinage is minted in silver, gold and electrum - a gold silver alloy. Electrum was considered to be a form of gold. It is most often about 60% - 40% gold to silver. The ratios can vary. Early Electrum dating back towards 600 BCE and perhaps beyond - dating is not an exact science - comes from the Black Sea area of what is now Turkey. Lydia, Ephesos, Samos, Lesbos, Chios, and Kyzikos all had early electrum issues. Those of Kyzikos are the most plentiful. Some Kyzikene staters are common by archaic standards, which means that perhaps twenty of a type might exist. Some of the most common Hektes exist in numbers far beyond that - perhaps in the fifties or sixties. By modern standards these are still tiny populations.

Electrum issues were divided into Staters of 14 to 16 grams (depending on the weight standard), half staters, third stater (Trites), sixth staters (Hektes) all the way down to 1/24 staters. Collecting electrum is interesting because you are collecting the very first coins in history. You are also collecting documents from a period from which very little documentation survives. You are collecting human history.

The great challenge to collecting electrum is that the grading system is least helpful in this ancient category. First, almost all electrum Staters in top condition are only AU (about uncirculated.). This puts off some grade conscious US collectors. Occasionally you'll see a mint state Hekte (sixth stater), but sometimes these can be hideous little coins with blundered images for which naive collects shell out top dollar. Second, the flan: shape, metal quality, and metal composition is part of the aesthetic creation, and there is no grade for this. Third, Style and Composition: (beautiful, intircate engraving with clean lines) is critically important and there is no grade for that. All this often keeps novice collectors on the sidelines. But for those who appreciate their own sense of aesthetics, and their own love of history this can be a very rewarding area.

Archaic gold tends to be a narrow category comprised of the issues of Kroisos of Lydia and then those of Persia. Kroisos issued gold on two weight standards - and early standard wherein a stater was about 10.8 grams and a reformed light standard where the stater was reduced to about 8.1 grams. The Persians then issued coins with Lydian designs. Heavy staters and derivatives tend to be very rare. Light staters of Kroisos about ten times as common. Light staters in the Persian style are about twice as common as Lydian style staters. The Persians then introduced the Daric, at about the same weight standard, wherein gold is divided into three basic designs: Shooting Darics, Dagger Darics and Running Darics, and occasionally Double Darics. Shooting Darics are very rare. Dagger Darics are quite nearly as rare. Running Darics are the most common ancient gold coin outside of Alexander staters. All archaic gold is very popular with collectors who tend to be very grade conscious, with gem mint examples existing. Though the designs of these coins do vary stylistically and can be important to more sophisticated collectors. As in all coinage beware of paying too much for poorly engraved and struck coins of very high quality preservation.

The next Category of Gold Ancients would comprise the period from Philip of Macedon through Alexander the Great and his generals: Seleukos, Lysimachos, and Ptolemy. These are issued in staters, Di (double) staters and occaissionally half staters, quarter staters and third staters and even tenth staters. Mostly based on an 8.6 grams to the stater standard. Though Ptolemy, in Egypt, broke the stater down to Drachms, which are roughly half staters and issued coins up to octo (eight drachms) with the very occasional Dekadrachm.

Again, these coins tend to by collected in a very grade conscious way. Some issues, like Philip staters, tend to be very large by ancient standards. Gem mint examples exist. And again, style, is tremendously important to the more sophisticated collector. Also, since many issues tend to exist in relatively great number (there must be perhaps between 1000 and 2000 Alexnader staters in existence) scholarly distinctions become important to many collectors. Mintmarks indicating issuing authorities can be collected. Again, it is important to beware of hideous, poorly engraved, badly struck coins of very high quality. They only appeal to novices. Then there are the portrait coins. Beautifully rendered portraits of Alexander, Lysimachos, Ptolemy, Seuleukos, of course, command great premiums in top condition for obvious reasons.

Finally, the third catagory of Greek gold ancients occurs in the Enemies of Rome. This includes Carthage, Syracuse, Epirus, the Tarantines, Mithridates and Heirs, and the Baktrians. Of these the Carthaginian and Syracusian coins are by far the most common. The Carthaginian series is extensive and includes staters, trihemistaters, shekels and fractions. This series also includes electrum coinage, which also traded as gold. Because of the relative availability and the similarity of images on various types, the series remains relatively affordable. As always, style varies greatly within issues. The Syracuse series includes coins minted under the various tyrants: Dionysus I, Agathocles, Timoleon, Hieron and Heironymous (who has but one issue.) All except the last are relatively available, though in high grade and fine style they are all challenging.

Then there is the coinage of Pyrhus, Mithridates, Eukratides etc. These are all very rare even by ancient standards. Coins in top grade can command very high prices. But coins in poor grades and poor style even when very rare are often difficult to move. The problem with extreme rarity is that there are few who collect. So few are looking for poor examples simply to fill out collections. However, connoisseurs will pay to get top examples of rarities.

Finally a note on ex-jewelry and repaired coins. They are considered to be almost the same as fakes. Don't buy them. If a coin has a 1 for surface don't buy it unless it's just for academic purposes.

Sunday, March 27, 2016

Gold coins and medals can be subdivided into many categorizes. The first and most obvious division is bullion gold and "Rare" gold. Bullion gold moves with the price of bullion. "Rare" gold has a correlation to bullion, but one that is far less obvious and less quantifiable. It moves with what Marx called the "Fetish Value" of gold.

The bullion price of gold trades in an open global market. Open, in that anyone with money can participate but not "free" in that no market on earth is truly free. All markets are rigged by their governing bodies who are owned by the largest trading houses and banks, which, by virtue of leverage, necessarily dominate the markets.

Think about Poker. If you have ten chips and you're playing against five guys with a million chips each, eventually they'll get your ten chips, no matter how good a player you might be. Now add in the fact that those five guys have levered the game with a bunch of arcane rules that benefit players with more chips and you get the idea of how markets work.

What this means is that markets always eventually reach a value that reflects underlying conditions but the time frame is unpredictable, because the markets are rigged.

So what does this have to do with Rare Gold Coins?

Well, since "Rare" gold coins trade in correlation to the Fetish Value of gold, it's important to realize that the bullion price may be at a certain level for a certain amount of time, yet the Fetish Value of gold can reflect a completely different dynamic.

People become increasingly interested in gold the more they lose Trust in their Government, their Currency, and their Financial Institutions.

For many the answer is simply bullion. The problem some see with bullion is the possibility that the very Institutions one seeks to protect oneself against, will eventually rig the bullion market in ways that make it impossible for anyone but them to benefit from it. This may or may not happen.

The hedge against this eventuality is Rare coins.

This is a hedge because and while Size is beneficial, supply is completely decentralized, so that it is difficult for large players to take advantage of their leverage.

Information is also largely decentralized, in spite of the internet. And the rare coins market is a tremendously information intensive market. It is easy to find out auction prices over the last fifteen years. But this is like understanding stock market prices over the last fifteen years. It tells you very little about anything but the very short term. And when you move back in time farther than a couple of hundred years, there are no population reports, few mintage records, and most written records are out of print and difficult to locate.

This levels the playing field in the rare coin market. Goldman Sachs does not deal in rare coins. And not simply because the market is too small. They'd be there in a heart beat if they had a real edge, to just take whatever was available. But they don't have an edge.

So if you're willing to put in the time to learn you can have an edge.

Sunday, March 20, 2016

Let's say you have an overview that suggests this is a good time to buy hard assets, and you have a particular affinity for numismatics.

Let's say you're interested in an investment and not simply the joy of a hobby.

Where to begin?

First Consideration: Historical Importance.

The first and foremost reason any hard asset has value is that it is considered to be Historically Important by some standard. Most usually because it is associated with a Person or Event. Anything that belonged to associated with Juilus Caesar, or John Lennon, or Geroge Washington, or Alexander the Great or Jesus Christ, to name a few.

Secondly perhaps because it is associated with a intriguing historical period. A Civil War uniform, the Gutenberg Bible, A Corinthian Helmet, A Tyrannosaurus skeleton etc.

Third, it may be important because the craftsmanship is second to none: A Rolls Royce Silver Shadow, A fender stratocaster, A Patek Philippe, A Lalique Cactus Table, A Badminton Cabinet, etc.

Historical Importance confers INTRINSIC VALUE. This is the major asset of the Hard Asset.

Second Consideration: Rarity.

If Julius Caesar wore a different helmet every day of his military life and all seven thousand of them had been preserved in a Roman Museum which existed to this day, and these were all available on the open market, A Julius Caesar War Helmet would still not be nearly as valuable as it would if only one or two existed.

Third Consideration: Condition.

To many this is as important or even more important that rarity. Let's say there were seven thousand Julius Caesar War helmets on the open market. The ones in the best condition would be worth many times that of those in lesser condition.

Let's say only one Alexander the Great War Helmet existed but it was in far worse condition that the worst of the Caesar helmets. Would it be worth more than the finest Caesar War Helmet? Probably, but not necessarily. Condition is certainly very important to many collector/investors.

Fourth Consideration: Beauty

Beauty is fourth only because it is by far the hardest to quantify. Yet Beauty is terribly important because it is also confers INTRINSIC VALUE.

In the case of the Seven Thousand Caesar Helmets, if one, for example, had been inlaid with a finely crafted scene depicting Caesar's marriage to Calpurnia with beautiful renderings of those two standing in front of a intricate temple scene, well you can imagine how much more valuable this might be than the other Caesar Helmets.
And if such a Helmet from the period existed though we didn't know whom was depicted, it still might be worth more than the finest Caesar Helmet. Beauty, though subjective, counts.

Thursday, March 17, 2016

The easiest thing in the world is to look up old auction prices. They are available at Coin Archives and AC Search. They will tell you everything you need to know about what coins and medals used to sell for at some point in the past. It is information everyone has.

And it is totally useless.

A. because everyone has it, so there's no advantage in it.

B. because it is knowledge about the past. Which, if you have any mathematical background, you should know, tells you nothing - or very little - about the future.

If you were looking, for example to by a house in Bed Stuy Brooklyn and the last time the building you're looking at changed hands was three years ago, and then it sold for $640,000, and now the new owner is asking 1.2 million, you might say, gee that's a terrible price. But if you take into account all the gentrification in that neighborhood, and the recent price inflation in Brooklyn in general, you might say, well that's market price but still, we must be in a bubble. But then if you look at the fact that everyone on earth wants to live in Brooklyn right now and that trend seems to be accelerating, and you consider that the building is pretty nice, nicer than most with original details etc, and much cheaper than the buildings going in the neighborhood just ten blocks away, then you might think, gee, that's a pretty good price. And then you consider the Fed just indicated that tightening is over so the whole mortgage market is likely to be supported and you think, wow maybe that's a bargain

So it is with numismatics. It's where the price will be in a year, two years, five years that counts. It where prices are heading for similarly rare coins, similarly beautiful coins, coins in similar condition , but perhaps from different periods, or from different areas. It's where the price is headed for all high end hard assets in relation to world monetary policy.

You need an overview.

You need to see where all hard assets are heading vis a vis currencies with which they are purchased.

You need to have a view of which currencies are likely to appreciate and which are about to crash and who that affects and what that implies for hard assets of different types.

Like stocks you need to understand sector rotations: You need to understand which areas of your particular interest are simply out of fashion and which are being bid up to speculative heights.

Then within the numismatics sector you have to have some understanding of supply and demand. Which areas are currently oversupplied or under-supplied and how likely are those trends to continue - or not.

In other words if this is more than just a hobby - you need to treat it as such. And the first thing to do is forget about what stuff cost last year - or five years ago - or ten years agao - or even last week.

It is entirely irrelevant to numismatics - just as it is irrelevant to all forms of investment.

You need to start thinking about where prices will be in the future. It's not easy. If it were easy everyone would do it.

Saturday, March 12, 2016

Yes, Definitively yes. The answer is so obvious it's all but a sure thing.

The fact is inflation is still rampant for the Household Sector.

Deflation is taking hold in the Fincancial Center - But that's a seperate issue.

For the Household Sector - which is the vast middle class, the value of money is being destroyed.

Don't look at the CPI. It measures nothing relevant.

The American Institue of Economic Research publishes the Everyday Price Index growing at over 8 percent year over year

Shadow Stats Alternate CPI using 1980's methodology shows prices growing year over year at over 10 percent .

And an index of the 500 most purchased items in the 50 largest cities in the US shows inflation growing at over 12 percent year over year. This index includes everything we spend on: insurance, education, heat, rent, food, energy, (IE everything the Government excludes in their absurd CPI figures).

Meanwhile rates are still near ZERO and that's exactly what you get when you loan your money to the bank.

The Banks take that money and use it to buy risk assets through speculative funds - like real estate, for example, in New York - pushing up home prices and rents higher and higher.

So you lose 10 percent per year on the future value of your money. The Banks gain 10 percent per year on the future value of your money and they use it to push prices higher so they profit again, as you suffer again when you rent or buy.

This is the whole reason the middle class is drowning. And it it the whole reason that GOLD - and every other private asset - Art, Numismatics, Antiques, Antiquities, Cars, Memorabilia etc are all going to go much much higher.

Because the value of money is being destroyed for the Household Sector - which is the vast middle class.

So everything of intrinsic value that can be purchased with deteriorating money must soar in value.

And as Public Financial Assets lose value especially in the the Vast Bond Universe which is in perhaps the biggest bubble the world has ever seen (this is the very real Financial Deflation you hear so much about) - the wealthy are already piling into private assets.

But soon even the middle class will follow as they lose confidence in the failing Institutions. And when that happens Gold and all other private assets will soar.

When? When will the middle class wake up and understand the source of their misery is not in immigrants or Isis or Mexicans or welfare recipients - but in the Monolithic Banking Sector?

When will it occur to the middle class that the Banking Sector - whose job it is to EFFICIENTLY ALLOCATE CAPITAL - has transformed itself into a monster that SUCKS CAPITAL OUT OF THE ECONOMY?

Timing is impossible. Anyone who claims to be able to time these things is an abject liar. Check their records. They make a new call every three months. When it finally comes true they forget their 50 wrong calls.

But, judging from the fact that Donald Trump will be our next president, I'd say the anger is already there. It's just a matter of locating the cause. And that will come

Tuesday, February 2, 2016

The United States of America is a socialist government. What does this mean?

It means that Communal Money is stripped from the Private Citizens (Household Sector) through taxes and policy initiative by the Government and then redirected towards projects, goals, classes, of its own choosing.

The major means of policy initiative to control the creation and flow of money in a socialist government is the CENTRAL BANK. The second most important means is Taxation.

Do we have a central Bank? Yes we do. Therefor we are socialist.

Do we have Taxation? Yes we do. Therefor we are socialist.

Whom does the central bank Benefit?

In other words to whom does the Central Bank direct the flow of money - and at whose expense?

The Central Bank directs the flow of money through the Member Banks that OWN the Central Bank: Chase, Bank Of NY, Goldman Sachs, ETC ETC. These banks then distribute created money to preferred clients (like Ted Cruz and Hillary Clinton) and Corporations closest to the Banks.

This is Socialism that benefits the Banking and Corporate Sector - at the expense of the Household Sector.

How is the Household sector taxed in this system?

The Household Sector receives money only at very high interest rates compared to the low rates charged by Banks to their preferred and corporate clients. Moreover, Savers of the Household Sector are essentially taxed through Negative Real Rates or Negative Rates on their savings that subsidize the banks and corporations.

Second, other policy initiatives that foster stagnant wages in relation to productivity also tax the Household sector while subsidizing the Corporate and Banking sectors. The United States is rife with many such policy initiatives (preferred treatment for stock options, capital gains, earned interest, repatriations from offshore accounts etc etc) which is why wages have been lagging productivity for over 40 years.

True, on the Taxation Side we have a mildly Progressive Rate the subsidizes the Household Sector. But endemic policy fostered Loopholes largely destroy that subsidy.

This is how American Socialism benefits the Banking and Corporate Sectors: and their powerful private clients like Ted Cruz an Hillary Clinton.

Any politician who receives FUNDING in the form of Speaking Fees - LOW INTEREST LOANS - or Direct Contributions. is SIMPLY AN EMPLOYEE OF THE BIG BANKS. And as such any such candidate is a SOCIALIST.

“Today, six and a half year after the collapse of Lehman, there is a
Bigger Short cooking. That Bigger Short is long-term claims on paper
money, i.e., bonds.”

Singer continues:

“History shows that it is fiendishly difficult to preserve the value of
money which is backed by nothing but promises, because it is so tempting
for rulers to debase their currency when they think it will help them
repay their debts. The long-term preservation of the real value (i.e.,
the purchasing power) of fiat money and bonds is obviously of little or
no importance to today’s creators of money…Yet, the current prices of
bonds are at all-time highs, and thus yields are at record lows, because
the central banks are buying bonds with trillions of dollars of newly
printed money”

Singer accuses the central banks of hampering the global economic
recovery by continuing to print money despite the fact that the
financial crisis ended nearly five years ago. Moreover, Singer observes
that the definition of money has become blurred since the 1970s, with
few market participants, or even Fed Chair Janet Yellen able to state that they fully understand what money and debt are.

“The Global Financial Crisis of 2008…was not an accident, but rather a
natural consequence of connectivity and excessive leverage. Because
policy makers have not fixed what went wrong in the GFC, and because
their solution has been to pile even more debt on top of the
already-sky-high indebtedness…we believe that a new, highly impactful
financial crisis is likely.”

Bigger Short - Timing the collapse

The difficult part of trying to forecast any crisis is timing the collapse. Early moves in the last crisis, notably Michael Burry, faced an investor revolt when they started betting against the market as early as 2005.
When
trying to assess a complex matter like this, Elliott finds it useful to
analyze complicated matters “and then transition, clearly and openly,
to opinion.” Over the past 40 years there has been a huge shift in the
working patterns across developed nations, productivity has fallen and
manufacturing jobs have been moved overseas. The full force of these
effects Singer notes hit the developed world during the last financial
crisis but policy makes have failed to react:

“Unfortunately, the political leadership of the developed world has been
very slow to recognize these major forces that are acting on their
economies, and very few effective new policies, or changes in existing
policies, have been put in place to counteract these negative trends.”

Serious reform has proved to be politically unpalatable, and debts have
continued to mount. Political leaders in the developed world have not
moved in any meaningful way toward policies that would stimulate
economic growth based on the new normal as it were. Stimulus efforts have largely been devoted
to supporting relatively inefficient public-sector jobs and government
spending. Further, the tone of policymakers populist and cranky toward
capitalists, finance, and financiers. As Singer notes:

“Not a welcoming environment for job creation, in a world in which capital will go where it is welcome.”

Elliott’s view is that central bankers have chosen, and doubled down on, a palliative (super-easy money and QE),
policy which is unprecedented and extreme, and whose ultimate effects
are unknowable. Somehow, the primary goal of both central banks and
policy makes has become to generate more inflation, and bondholders have
ignored this fact. The goal of generating more inflation is aimed at
reducing the value of their capital. Moreover, the financial world has
become used to slow-and-steady central bank movements.

“We call to your attention the hand-wringing and agonizing now underway
about raising U.S. policy rates by 25, 50 or 75 basis points over the
next few months. Imagine the caterwauling in global financial markets if
inflation surprises everyone on the upside and the right policy rate
should be 2%, 4% or higher. Given the fragility of the financial system
and its still-extreme leverage, even a few points of inflation and a few
hundred basis points of increase in medium- and long-term interest
rates could cause a renewed financial crisis.”

The Bigger Short: A poor deal

Singer goes on to discuss the poor
deal the bondholders of today are getting. At current interest rates on
long-term bonds, if there is any level of inflation over the next
10 to 30 years, investors who buy or hold bonds at today’s prices and
rates will have made a terrible mistake. If inflation takes off, they
are truly in trouble.
Equity
values are more flexible, assuming policymakers continue to allow
private enterprise, profits and private ownership of assets.
The numbers Singer presents to back up his “Bigger Short” case are pretty staggering.
At the time of writing, the German 30-year bond with a 2.5% coupon
traded at 153.4, giving a yield to maturity of 0.62%. However, if the
market yield for 30-year paper rises to 1% the bond price will decline
by 8.6%, which, when compared to the starting yield of 0.62% is a
concerning loss. But that’s not all, if the yield on the 30-year paper
were to increase to 2% – a level seen only several months ago – the bond
price would fall by 27%. A 3% yield would result in a capital loss of
41% and a 4% yield would cause a loss of 51.5% to a price of 73.5.

“This
risk-reward profile is pure madness. Imagine any holder taking the
risk, for a maximum yield of 0.62% for 30 years, of losing 40% or 50% of
capital if interest rates simply revert to historically normal levels
with a small amount of inflation, to say nothing of serious inflation or
hyperinflation.”

Bonds are no longer a low-risk
asset but money continues to flow into the sector, pushed by central
bank policies and public sector purchases.
Singer concludes:

“A
good or great trade is not created by just the prospect of a big move
in a direction. The ability of investors to engage in a superior
risk/reward profile, and to finesse the question of when the expected
move will occur, is what separates “just-ok” trades from great trades.
It is the extreme overpricing of bonds, and the universal confidence
(unjustified, in our opinion) of investors in central banks and in the
current mix of perceptions about what is safe and what is not, that
makes the Bigger Short into possibly a great trade.”